Davis, Christina Fuchs, Andreas Johnson , Kristina
Year of Publication:
Discussion Paper Series, University of Heidelberg, Department of Economics 576
Do states use trade to reward and punish partners? WTO rules and the pressures of globalization restrict states’ capacity to manipulate trade policies, but we argue that governments can link political goals with economic outcomes using less direct avenues of inﬂuence over ﬁrm behavior. Where governments intervene in markets, politicization of trade is likely to occur. In this paper, we examine one important form of government control: state ownership of ﬁrms. Taking China and India as examples, we use bilateral trade data by ﬁrm ownership type, as well as measures of bilateral political relations based on diplomatic events and UN voting to estimate the effect of political relations on import and export ﬂows. Our results support the hypothesis that imports controlled by state-owned enterprises (SOEs) exhibit stronger responsiveness to political relations than imports controlled by private enterprises. A more nuanced picture emerges for exports; while India’s exports through SOEs are more responsive to political tensions than its ﬂows through private entities, the opposite is true for China. This research holds broader implications for how we should think about the relationship between political and economic relations going forward, especially as a number of countries with partially state-controlled economies gain strength in the global economy.